Nervous investors piled into absolute return and fixed income funds in 2016 as rocky global events caused them to shy away from 'risky' equity funds.

Funds invested in shares suffered outflows of £8.2billion last year, despite being the best selling asset class of 2015. Every regional equity sector saw outflows - with UK equity losing £4.9billion over the course of the year. Only global equities saw inflows, potentially as investors looked to diversify their risk.

Retail property funds also had a difficult year after many were compelled to suspend trading as the Brexit vote prompted a liquidity crunch. Overall, the asset class saw outflows of £2billion.

Instead, the big winner was targeted absolute return with inflows of £5.1billion, making it the best selling sector of the year.

As the name suggests, targeted absolute return funds aim to deliver a positive return in any market condition, while fixed income funds tend to be lower risk than equities, although they also offer less of an upside.

However, 2016 saw equity markets 'climb the wall of worry' to scale new highs, while targeted absolute return funds were the worst performing of any Investment Association fund sector, with an average rise of just 0.97 per cent.

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Fixed income as a whole was also favoured by investors, with net retail sales of £3.8billion - after seeing outflows of £2.1billion in 2015. But sales of retail investment funds slumped by 72 per cent on 2015 figures, falling from £16.8billion to £4.7billion, the figures from the Investment Association show.

Last year was dominated by the events surrounding the referendum in the UK and election in the US and it seems many investors were looking to dial down risk as they were fearful of a sharp drop in the market.

Net retail fund sales in 2016

2016 ranking

Asset class

2016 net retail sales

2015 ranking

2015 net retail sales

1

Other

£6bn

2

£4.1bn

2

Fixed Income

£3.8bn

6

-£2.1bn

3

Mixed Asset

£2.6bn

3

£3.7bn

4

Money Market

£2.4bn

5

£704m

5

Property

-£2bn

4

£2.7bn

6

Equity

-£8.2bbn

1

£7.8bn

Figures: The Investment Association

Adrian Lowcock, investment director at Architas said: 'The terrible start to 2016 in equity markets caught investors by surprise. While the outlook improved throughout the year equity markets were largely driven by the big macro events including Brexit and the US presidential election. With this backdrop investors clearly chose to go defensive through targeted absolute return funds and money market funds.'

However, many investors were wrong footed.

'On both occasions the results surprised, but what surprised more was the reaction of stock markets,' said Lowcock. 'With Brexit, the pound fell as expected but after a short fall stock markets recovered strongly. With Donald Trump's election, any sell-off was even shorter.'

Mark Dampier, head of investment research at Hargreaves Lansdown, agreed, suggesting 'the targeted absolute return sector is popular as it is being used as a bond substitute, while the rise in money market funds illustrates how fearful investors have become despite rock bottom interest rates'.

He pointed out the strong showing of passive funds - which track the movement of the market - over the past year.

'Trackers continue to make headway, partly because their performance reflects the very traditional asset allocation that so many active managers have rejected over the past few years. In other words, where active managers have become cautious far too early the result has been that over the period, passive performance has often been much better,' he added.

FUND JARGON BUSTER

The investment industry's world of abbreviations...Acc: Accumulation - any income generated by the fund like dividends or interest is automatically reinvested.Inc: Income - any income generated is distributed by the fund instead of being reinvested. Dis: Distribution - any income generated is distributed by the fund instead of being reinvested. R: Retail - the fund is aimed at ordinary investors. I/Inst: Institutional - the fund is aimed at corporate investors like pension funds. A, B, M, X etc: Different fund houses use letters for different things. Check with them what they stand for. NT/No trail: Some fund houses use this name on clean funds which carry no commissions for financial advisers, supermarkets or brokers, just the fee levied by the fund manager. But other fund houses use different letters - I, D or Y, for example - so you need to find out for yourself which are clean funds. Gr: Stands for gross. GBP/£: Fund denominated in pounds. EUR: Fund denominated in euros. USD/$: Fund denominated in US dollars. Compiled with online stockbroker The Share Centre